SESSION 11 – PARTNERSHIP ACCOUNTS

OVERVIEW
Objective

¾ To prepare financial statements for partnerships and account for changes in the
partnership.

¾ Definition
PARTNERSHIPS ¾ Nature
¾ Legal liability
¾ Agreement
¾ Advantages & disavantages

¾ Format
ACCOUNTS

BALANCE INCOME
SHEET STATEMENT

¾ Capital accounts ¾ Loans from partnership

¾ Current accounts ¾ Appropriation statements
¾ Disclosure ¾ Drawings
¾ Interest on drawings
¾ Guaranteed minimum profits
CHANGES IN
COMPOSITION OF
A PARTNERSHIP
¾ Situation
¾ Revaluation
¾ Goodwill
¾ Change during year

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SESSION 11 – PARTNERSHIP ACCOUNTS

1 PARTNERSHIPS
1.1 Definition

¾ Two or more persons carrying on a business in common with a view to profit.

(“Persons” may be limited companies and not just individuals.)

¾ Examples:

‰ Accountants;
‰ Doctors;
‰ Dentists;
‰ Solicitors/Lawyers;
‰ Husband and wife owning a small kiosk.

¾ Types of partner:

‰ General;
‰ Local;
‰ Salaried (income is earnings);
‰ Limited;
‰ “Sleeping” (income is investment not earned).

1.2 Nature

¾ Partners are working in the business (they are “owner managers”), unlike most
shareholders.

¾ An agreement exists (usually) to regulate business conduct and dealings.

¾ A partnership does not have a separate legal form, it is just a collection of people (unlike
a company).

¾ Liability is UNlimited.

A partner in an accountancy firm signs an auditor’s report on behalf of the “firm” (i.e.
partnership). As the firm has no separate legal identity the other partners are “bound”
by the signature. If the opinion is wrong, and the firm is sued for damages
(compensation) in court, all the partners are liable.

Commentary

In a “limited liability partnership”(LLP) at least one partner must have unlimited

liability (i.e. risks losing his money, home, car, spouse’s car, etc).

1.3 Legal liability

¾ The partnership is liable if any individual partner acting in normal course of business
carries out any wrong going.

¾ If one partner is sued for wrong doing, the other partners may be sued also – “joint and
several liability”.

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1.4 Partnership agreement

Commentary

Although this can be oral this is unlikely, as risky.

¾ Typical contents, by negotiation:

‰ Who the partners are or may be (e.g. only certified accountants);

‰ The objects (e.g. to provide advisory services);

‰ Capital paid in to finance partnership;

‰ Interest on capital;

‰ Profit sharing ratio (PSR) (i.e. how profits and losses are to be shared);

‰ Salaries (if only some partners provide services for firm);

‰ Whether drawings (advances on profits) are allowed (and if interest is charged

thereon);

‰ Procedures if partnership changes;

‰ Taxation (especially in husband and wife partnerships).

¾ Signed by all existing members.

¾ If no agreement some legislation may apply. For example in England and Wales the
Partnership Act 1890 applies as follows:

‰ No interest on capital or current accounts;

‰ No salaries;
‰ Profits and losses shared equally;
‰ 5% interest on loans made by partners to the partnership.

1.5 Advantages and disadvantages

1.5.1 Compared with a sole trader

9 Risk is shared (between partners). 8 May be disputes.

9 Partners provide a range of 8 Some partners work harder for firm

specialised skills (offered as “One- than others.
stop shopping” for customers).

9 More capital available. 8 Joint and several liability.

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SESSION 11 – PARTNERSHIP ACCOUNTS

1.5.2 Compared with incorporated entities

9 Less formal set up. 8 Partnership structure can be

cumbersome (as any admission/
retirement results in dissolution of the
partnership).

9 No company formalities (e.g. 8 Much easier to sell shares than to

statutory audits and accounts filing). realise capital in a partnership.
(However, an audit may still be
required under other business or 8 Liability is unlimited.
professional regulations.)

2 ACCOUNTS
2.1 Format

¾ Balance sheet (BS) – instead of just one capital line, one reserves line and one drawings
line, one is needed for each partner.

¾ Income statement – Profit is determined in same way as for a sole trader. However, an
“appendix” is needed to allow calculation of how the profit (or loss) is divided up
between the partners. (For example, equally or according to capital contributed, etc.)

3 BALANCE SHEET
The capital section is the only difference between a sole trader’s and partnership’s accounts.

3.1 Capital and current accounts

3.1.1 Capital accounts 3.1.2 Current accounts

¾ Show the partners’ share of fixed capital ¾ Show the partners’ share of
introduced profits/losses and drawings
made

¾ When capital accounts are not distinguished from current accounts:

‰ each partner has just one a/c;

‰ the capital base may be undercapitalised (i.e. eroded by excess drawings).

¾ Overdrawn accounts are not prohibited in law (but may be forbidden by partnership
agreement).

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 SESSION 11 – PARTNERSHIP ACCOUNTS

T accounts

Capital a/c Current a/c

A B C A B C A B C A B C
$ $ $ $ $ $ $ $ $ $ $ $
Bal b/f x x x Bal b/f x x x
Cash Drawings x x x Profit x x x
Bal c/f x x x introduced x Bal c/f x x Bal c/f x
__ __ __ __ __ __ __ __ __ __ __ __
x x x x x x x x x x x x
__ __ __ __ __ __ __ __ __ __ __ __
Bal b/f x x x Bal b/f x Bal b/f x x

Represents overdraft on current a/c

Commentary

Other adjustments (e.g. for goodwill) are considered later.

3.2 Disclosure

$ $
Net assets x
__
Represented by
Capital accounts – A x
–B x
–C x
__
the
x same
Current accounts – A x amount
–B x
–C x
__
x
__
x
__

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4 INCOME STATEMENT
4.1 Loans from partners

¾ These are more temporary in nature than fixed capital.

¾ Shown as a long-term liability on balance sheet.

¾ Loan interest is charged to income statement as normal business expense;

not an appropriation of profit.

Double entry
Dr Income statement x
Cr Partners’ current a/c x
or
Cr Cash x
(if paid to partner)

Commentary

A partner receives interest in his capacity as a lender, not a partner.

4.2 Appropriation statement

¾ Calculate net profit for the period in exactly the same way as for a sole trader.

¾ Divide profit between partners, via an appropriation statement, in accordance with the
terms of the partnership agreement.

¾ Typical appropriations are:

‰ interest on capital (%) – gives recognition to partners contributing different

amounts of capital to the firm;

‰ salary (annual) – not to be confused with salaries paid to employees (which are an
expense in the income statement);

‰ profit share (PSR applied to balance).

¾ Capital profits and revenue profits may be shared in different ratios.

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 SESSION 11 – PARTNERSHIP ACCOUNTS

Example 1

A and B are in partnership. They share profits in the ratio 2:1.

At the start of the partnership, they both paid in capital as follows:

A $3,000
B $2,000

No salaries are paid and there is no interest on capital.

During the year, the partnership made a profit of $10,000.

Required:

Prepare the partnership accounts for the year.

Solution
Appropriation a/c
$ $

______
______
______
______

Current a/c
A B A B
$ $ $ $

Capital a/c
A B A B
$ $ $ $

Commentary

Note the “columnar format”. Profit must be before any payments to the partner – in
this example it is.

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SESSION 11 – PARTNERSHIP ACCOUNTS

Example 2

C and D are in partnership. They share profits equally. Initial capital paid in
by the two partners was as follows:
C $18,000
D $12,000.

The partners receive salaries from the partnership as follows:

C $6,000 pa
D $3,000 pa.

Interest is paid on (initial) capital at 10% pa.

Year 1

During the year the partnership earned a profit of $18,000, after deducting C’s
salary. Drawings during the year were:
C $12,000
D $9,000.

Year 2

Profit for the year, after C’s salary was $5,000. No drawings were made during
the year.

Required:

Prepare the partners’ accounts.

Commentary

Profit needs to be adjusted. FIRST take out any profit which is used to pay interest or
salaries to partners. Use the current a/c for messing about with capital and the capital
a/c just for initial capital.

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 SESSION 11 – PARTNERSHIP ACCOUNTS

Solution

Appropriation a/c
C D Total C D Total
$ $ $ $ $ $
Year 1 Year 1

______
______ ______ ______
______
______ ______ ______
Year 2
Year 2

____ ____ ______

_____ _____ ______
____ ____ ______
_____ _____ ______

Current a/c
C D C D
$ $ $ $
Year 1

______ ______ ______ ______

______ ______ ______ ______

Year 2

_____ _____ _____ _____

_____ _____ _____ _____

Capital a/c
C D C D
$ $ $ $

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SESSION 11 – PARTNERSHIP ACCOUNTS

Proforma appropriation statement

Total A B C
$ $ $ $
Salary x x x
Interest on capital x x x x
Interest on drawings (x) (x) (x) (x)
__ __ __ __
x x x x
Residual profit (in PSR) x (Bal) x x x
__ __ __ __
x x x x
__ __ __ __

= net profit for appropriation from I & E a/c

¾ Salaries – not to be confused with salaries paid to employees (which are an expense in
the income statement)

¾ Interest on capital – gives recognition to partners contributing different amounts of

capital to the firm.

4.3 Drawings

¾ This is the normal means by which partners take funds out of the
partnership.

Double entry

Dr Current a/c partner A, B or C x

Cr Cash x
or
Cr Purchases x
(goods taken at cost)

or
Cr Sales x
(goods taken at full selling price)

¾ Usually taken out on a regular basis (e.g. by standing bank order).

¾ Money out of fixed capital is unusual and needs approval of all other partners.

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 SESSION 11 – PARTNERSHIP ACCOUNTS

4.4 Interest on drawings

¾ Treatment is as for interest on capital but “in reverse”.

¾ A partnership pays interest on capital to compensate partners for their money tied up in
the firm. If partners make drawings early, they compensate the firm.

Double entry
Dr Current a/c of partner x
Cr Appropriation a/c x

Example 3

Alpha and Beta are in partnership, sharing profits in the ratio 3:2. Alpha is to
be allowed an annual salary of $6,000, and Beta $10,000. Interest on fixed
capital accounts is to be paid at 5% per annum. Interest is charged on
drawings at 5% per annum. Both capital and current accounts are to be kept
for each partner. The capital balances held by each partner throughout the
year are:

Alpha $25,000
Beta $50,000.

Drawings were made in equal instalments, the first 50% being drawn half way
through the year and the rest at the end of the year. Total drawings were:

Alpha $10,000
Beta $20,000.

The profit for the year was $44,375.

Required:

Prepare the appropriation account and current accounts for the partners for the
year. Also prepare the balance sheet capital section.

Solution
Appropriation a/c
A B Total A B Total
$ $ $ $ $ $

______ ______ ______ _____ _____ ______

______ ______ ______ _____ _____ ______

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SESSION 11 – PARTNERSHIP ACCOUNTS

Current a/c
A B A B
$ $ $ $

______ ______ ______ ______

______ ______ ______ ______

Capital a/c
A B A B
$ $ $ $

Balance sheet
A B Total
$ $ $
Capital
______ ______
Current
Opening balance – –

Salary

Interest on capital

Profit
______ ______

Drawings
Drawings

Interest on drawings
______ ______
Closing balance
______ ______ ______
Total owner’s equity
______

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 SESSION 11 – PARTNERSHIP ACCOUNTS

4.5 Guaranteed minimum profits

Illustration 1

A, B and C are in partnership sharing profits in the ratio 4: 2: 1. C is

guaranteed a minimum profit of $10,000.

Solution

¾ Depends on conditions in partnership agreement. For example

‰ irrespective of the firm’s results

‰ only if the firm makes a profit
‰ only if the firm makes a profit of at least $10,000.

Example 4

A, B and C are in partnership, sharing profits in the ratio 4:2:1 but C has a
guaranteed minimum profit share of $10,000. A is paid a salary of $1,000 per
annum.

Total profit in year 1 was $81,000.

Total profit for year 2 was $40,000.

Required:

Prepare the partnership current accounts for both years.

Solution
Appropriation a/c
A B C Total A B C Total
$ $ $ $ $ $ $ $

______ ______ ______ ______

______
______ ______ ______ ______
______

______ ______ ______ ______

______
______ ______ ______ ______
______

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SESSION 11 – PARTNERSHIP ACCOUNTS

Current a/c
A B C A B C
$ $ $ $ $ $

______ ______ ______ ______ ______ ______

______ ______ ______ ______ ______ ______

______ ______ ______ ______ ______ ______

______ ______ ______ ______ ______ ______

5 CHANGES IN COMPOSITION OF A PARTNERSHIP

5.1 Situations

¾ Legally, the old partnership is dissolved and a new one starts on:

‰ admission of a new partner

‰ retirement of a partner.

5.2 Revaluation

Any change in partnership affects partners’ rights to profits and assets. The extent to which
fair values differ from book values must be fairly allocated between partners.

¾ Changes in value of assets at the date of change are shared between existing partners in
their (“old”) PSR.

For an increase in For a reduction in

value value

Dr Asset a/c Cr Asset a/c

Cr Existing partners (in PSR) Dr Existing partners (in PSR)

¾ If many assets are revalued:

‰ accumulate in a revaluation a/c; then

‰ transfer the net revaluation to partners in PSR.

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 SESSION 11 – PARTNERSHIP ACCOUNTS

5.3 Goodwill

¾ A new partner admitted to an existing partnership buys a share of business assets. These
include:

‰ tangible assets – individual assets have “fair value” greater than book value; and

‰ an intangible asset that is goodwill – attributable to things such as reputation of

firm (for quality product, integrity, etc), loyal customer base, management team,
skilled workforce, etc.

Commentary

Although some accounting policies seek to put a market value on certain assets (e.g. if
property is measured under a revaluation model) the majority of assets will be
measured using a cost model. Remember that many intangibles will not be recognised
because they do not meet the asset recognition criteria. Specifically IAS 38 prohibits
recognition of internally-generated goodwill (see earlier session).

5.3.1 Revaluation methods

¾ To crystallise the “worth” of the partnership to the old partnership goodwill must be
revalued (just like any other asset).

¾ Two methods:

‰ revalue individual assets;

‰ overall calculation (“global method”).

5.3.2 Accounting entries

¾ Whatever the method of revaluation, the accounting entries are the same.

¾ To record goodwill

Dr Goodwill
Cr Existing partners (in PSR)

¾ However, goodwill is not usually carried in the balance sheet. Therefore it is eliminated
after the change:

Dr New partners (in “new” PSR)

Cr Goodwill

Commentary

Generally assets are accounted for using cost models. Consider that IAS 16 and IAS
38 require that the values of assets accounted for under revaluation models must be
kept up-to-date. This would be time-consuming and costly for partnerships so
revaluations are made only when necessary (i.e. when the partnership structure is
changed).

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SESSION 11 – PARTNERSHIP ACCOUNTS

Example 5

Two partners, C and G sharing profits 2:1. The balance sheet as at 31

December 2006 prepared on a historical cost basis is as follows:
Solution (b)(i)
$ $ $ $
Non-current assets
Property 40,000
Equipment 10,000
______ ______
50,000
Current assets
Inventories 10,000
Trade receivables 10,000
Cash 5,000
______ ______
25,000
______ ______
Total assets 75,000
______ ______
Capital
C 40,000
G 25,000
______ ______
65,000
Current liabilities
Trade payables 10,000
______ ______
75,000
______ ______
C and G are aware that:
(1) The property has a market value of $65,000 (cost $40,000).
(2) The equipment is obsolete and worth only $5,000.
(3) There is a bad debt of $1,000 which has not been provided for.
(4) The balance sheet does not reflect the real “worth” of the business. The
partners estimate they could sell the business as a going concern for
$95,000.
B joins the partnership by paying in capital of $25,000. The new profit sharing
ratio is 2:1:1.
Required:

(a) Show the changes in the partner’s capital accounts for B’s joining without
taking account goodwill or the revaluation.
(b) Show the changes in the balance sheet, taking into account goodwill
adjustments, using:
(i) individual assets method;
(ii) global method.

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 SESSION 11 – PARTNERSHIP ACCOUNTS

Revaluation a/c (in) Revaluation (out)

$ $ $ $

Old partnership New partnership

Old ratio New ratio

Capital a/c
C G B C G B
$ $ $ $ $ $

In summary

¾ The net effect of revaluing goodwill and then eliminating it is:

Dr New partners in new PSR  with

 value of
Cr Old partners in old PSR  goodwill

5.4 Change during year

¾ Need to split income statement into old and new partnerships, and appropriate profit
for each part of the year according to relevant profit sharing arrangements in force.

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SESSION 11 – PARTNERSHIP ACCOUNTS

¾ Use a columnar income statement:

Before After Total

for year
$ $ $
Sales x x x
Cost of goods sold x x x
___ ___ ___

Gross profit x x x
Expenses x x x
___ ___ ___

Net profit x x x
___ ___ ___

Appropriate per Old PSR New PSR

¾ Possible bases for splitting income statement:

‰ Gross profit – according to turnover

‰ Expenses and overheads – on a time basis
‰ Specific costs – as a fact (e.g. legal expenses associated with an outgoing partner to
old partnership).

Commentary

Apportionments will be approximations. Consider for example that any selling and
distribution costs in expenses could be more accurately matched with sales rather than
pro-rated on a monthly basis.

Key points

³ Capital accounts record “fixed” capital (i.e. capital introduced) including

the effects of goodwill on changes in the partnership structure.

³ Current accounts record day-to-day transactions with partners (e.g.

drawings) and appropriations of profits (including salaries).

³ Drawings of goods are usually accounted for as a reduction in purchases

(at cost) rather than a sale (at more than cost).

³ On a change of partnership (e.g. admission), assets are revalued and

goodwill is adjusted against capital account balances.

³ When a change occurs during a year profit for the year is attributed to the
periods before and after the change and appropriated according to the old
and new profit sharing arrangements.

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 SESSION 11 – PARTNERSHIP ACCOUNTS

FOCUS
You should now be able to:

¾ identify the advantages and disadvantages of operating as a partnership; understand

and identify the typical contents of a profit sharing agreement including profit-sharing
terms;

¾ understand the nature of:

‰ capital accounts;
‰ current accounts;
‰ division of the profits;

¾ calculate and record:

‰ the partners’ shares of profit/losses;

‰ partners’ drawings;
‰ interest on drawings;
‰ interest on capital;
‰ partner salaries;

¾ account for guaranteed minimum profit shares;

¾ prepare an extract of:

‰ a current account;
‰ a capital account;

¾ prepare extracts of the income statement, including division of profit ,and balance sheet
for a partnership

¾ define goodwill, in relation to partnerships accounts;

¾ identify the factors leading to the creation of goodwill in relation to partnership

accounts; and

¾ calculate the value of goodwill from given information.

Commentary

Questions on partnerships may include the effect of admission of new partners.

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SESSION 11 – PARTNERSHIP ACCOUNTS

EXAMPLE SOLUTION
Solution 1 — Appropriation Statement

Profit must be before any payments to the partner:

Appropriation a/c
$ $
A 6,667 Profit 10,000
B 3,333
______ ______
10,000 10,000
______ ______

Current a/c
A B A B
$ $ $ $
Profit share 6,667 3,333

Capital a/c
A B A B
$ $ $ $
B/f 3,000 2,000

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 SESSION 11 – PARTNERSHIP ACCOUNTS

Solution 2 — Salaries and profit appropriation

Profit needs to be adjusted. First take out any profit which is used to pay interest or salaries
to partners.

Appropriation a/c
C D Total C D Total
$ $ $ $ $ $
Year 1 Year 1
Salaries 6,000 3,000 9,000 Profit (18,000
Interest on + 6,000) 24,000
capital (10%) 1,800 1,200 3,000
Profit (1:1) 6,000 6,000 12,000β
______ ______ ______ ______
13,800 10,200 24,000 24,000
______ ______ ______ ______
Year 2 Year 2
Salaries 6,000 3,000 9,000 Profit (5,000
Interest 1,800 1,200 3,000 + 6,000) 11,000
“Loss” (1:1) 500 500 1,000β
_____ _____ ______ ___ ___ ______
7,800 4,200 12,000 500 500 12,000
_____ _____ ______ ___ ___ ______

Current a/c
C D C D
$ $ $ $
Year 1 Salaries 6,000 3,000
Drawings 12,000 9,000 Interest on capital 1,800 1,200
Bal c/f 1,800 1,200 Profit 6,000 6,000
______ ______ ______ ______
13,800 10,200 13,800 10,200
______ ______ ______ ______
Year 2 B/f 1,800 1,200
Loss share 500 500 Salaries 6,000 3,000
Bal c/f 9,100 4,900 Interest on capital 1,800 1,200
_____ _____ _____ _____
9,600 5,400 9,600 5,400
_____ _____ _____ _____
B/f 9,100 4,900

Capital a/c
C D C D
$ $ $ $
Initial capital 18,000 12,000

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Solution 3 — Salaries, Interest and drawings

Appropriation a/c
A B Total A B Total
$ $ $ $ $ $
Salaries 6,000 10,000 16,000 Profit 44,375
Interest on Interest on
capital (5%) 1,250 2,500 3,750 drawings (W)125 250 375
Profit share
(3:2) 15,000 10,000 25,000 β
______ ______ ______ ___ ___ ______
22,250 22,500 44,750 125 250 44,750
______ ______ ______ ___ ___ ______

Current a/c
A B A B
$ $ $ $
Interest on drawings 125 250 Salaries 6,000 10,000
Drawings 10,000 20,000 Interest on capital 1,250 2,500
C/f 12,125 2,250 Profit share 15,000 10,000
______ ______ ______ ______
22,250 22,500 22,250 22,500
______ ______ ______ ______

Capital a/c
A B A B
$ $ $ $
B/f 25,000 50,000

WORKING

First ½ year Second ½ year Interest @ 5%

Nil A $5,000 ½ × 250 = 125

Nil B $10,000 ½ × 500 = 250

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 SESSION 11 – PARTNERSHIP ACCOUNTS

Balance sheet
A B Total
$ $ $
Capital 25,000 50,000 75,000
______ ______
Current
Opening balance – –
Salary 6,000 10,000
Interest on capital 1,250 2,500
Profit 15,000 10,000
______ ______
22,250 22,500
Drawings
Drawings (10,000) (20,000)
Interest on drawings (125) (250)
______ ______
Closing balance 12,125 2,250 14,375
______ ______ ______
Total owner’s equity 89,375
______

Solution 4 — Guaranteed minimum profit

Appropriation a/c
A B C Total A B C Total
$ $ $ $ $ $ $ $
Salary 1,000 1,000 Profit 81,000
Profit share (W1)
(4:2:1) 45,714 22,857 11,429 80,000 β
______ ______ ______ ______
______
46,714 22,857 11,429 81,000
______ ______ ______ ______
81,000
______
Salary 1,000 1,000
Profit share Profit 40,000
(W2) 19,333 9,667 10,000 39,000 β
______ ______ ______ ______ ______
20,333 9,667 10,000 40,000 40,000
______ ______ ______ ______ ______

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SESSION 11 – PARTNERSHIP ACCOUNTS

Current a/c
A B C A B C
$ $ $ $ $ $
Salary 1,000 – –
C/f 46,714 22,857 11,429 Profit share 45,714 22,857 11,429
______ ______ ______ ______ ______ ______
46,714 22,857 11,429 46,714 22,857 11,429
______ ______ ______ ______ ______ ______
B/f 46,714 22,857 11,429
Salary 1,000 – –
C/f 67,047 32,523 21,429 Profit share 19,333 9,666 10,000
______ ______ ______ ______ ______ ______
67,047 32,523 21,429 67,047 32,523 21,429
______ ______ ______ ______ ______ ______

WORKINGS

(1) C’s share 1/7 × 80,000 = 11,429 (exceeds $10,000 ∴ minimum does not apply)

(2) C’s share 1/7 × 39,000 = 5,571 (which is less than $10,000 ∴ minimum applies)
C→ 10,000
A→ 4/6 × 29,000 = 19,333

B→ 2/6 × 29,000 = 9,667

Solution 5 — Admission

(a) Without goodwill or revaluation

¾ B introduces new capital $25,000 so cash (and current assets) increase by $25,000 and
total assets become $100,000.

¾ Capital is increased by $25,000 to $90,000 attributed to the partners as follows:

$
C 40,000
G 25,000
B 25,000
______
90,000
______

Commentary

Consider that it assets are sold immediately after the admission B would get a share of
the profits on them. This is not equitable as he was not a partner contributing to any
enhancement of the asset values that arose before he was admitted.

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 SESSION 11 – PARTNERSHIP ACCOUNTS

(b) (i) Individual assets method

Revaluation “in” With B Revaluation” out”

$ $ $ $ $
Non-current assets
Property 40,000 + 25,000 65,000 65,000 – 25,000 40,000
Equipment 10,000 – 5,000 5,000 5,000 + 5,000 10,000
______
50,000
Goodwill + 11,000 11,000 11,000 – 11,000 –
_______ _______ _______
81,000 81,000 50,000
Current assets
Inventories10,000 10,000 10,000 10,000
Trade
receivables 10,000 – 1,000 9,000 9,000 + 1,000 10,000
Cash 5,000 5,000 + 25,000 30,000 30,000
______ _______ ______ _______
25,000 24,000 49,000 50,000
______ _______ _______ _______
Total assets 75,000 105,000 130,000 100,000
______ _______ _______ _______
Capital
C 40,000 + 20,000 60,000 60,000 – 15,000 45,000
G 25,000 + 10,000 35,000 35,000 – 7,500 27,500
______ _______
B (new) + 25,000 25,000 – 7,500 17,500
_______ _______
65,000 95,000
120,000 90,000
Current liabilities
Trade payables 10,000 10,000 10,000 10,000
______ _______ _______ _______
75,000 105,000 130,000 100,000
______ _______ _______ _______

Revaluation a/c (in) Revaluation (out)

$ $ $ $
Equipment 5,000 Property 25,000 Property 25,000 Equipment 5,000
Bad debt 1,000 Goodwill 11,000 Goodwill 11,000 Bad debt 1,000
To be shared To be shared
30,000 (2:1) 30,000 (2:1:1)
C 20,000 C 15,000
G 10,000 G 7,500
B 7,500
______ ______ ______ ______
36,000 36,000 36,000 36,000
______ ______ ______ ______

Old PS New PS
Old ratio New ratio

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SESSION 11 – PARTNERSHIP ACCOUNTS

Capital a/c
C G B C G B
$ $ $ $ $ $
Goodwill out 15,000 7,500 7,500 B/f 40,000 25,000 –
C/f 45,000 27,500 17,500 Goodwill in 20,000 10,000 –
B in – – 25,000
______ ______ ______ ______ ______ ______
60,000 35,000 25,000 60,000 35,000 25,000
______ ______ ______ ______ ______ ______

(b) (ii) Global method

Commentary

The balance sheet is not restated item by item. Goodwill is simply adjusted (in and
out) through the partners’ capital accounts.

Old 2:1 New 2:1:1

$ $
C 20,000 15,000
G 10,000 7,500
B – 7,500
______ ______
30,000 30,000
______ ______

1126